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March 25, 2013

What Really Drives Giving? (It’s Not Tax Breaks)

Advisors can play big role in helping wealthy design robust giving strategies

Forget the warnings that reducing or eliminating income tax deductions will pull the rug out from under charitable giving by the wealthy.

A new study by SEI Private Wealth Management shows that giving “defines individuals and gives a purpose to their wealth.”

Indeed, most high-net-worth donors would give more if they could develop a strategic approach and better measure the effects of their philanthropy.

SEI surveyed some 200 multimillionaires with average net worth of nearly $11 million online last November.

SEI found that individuals donated 12% of their wealth to causes every year, with women likely to give 20% more than men.

However, respondents’ actual giving contrasted sharply with how much they would like to allocate to causes—more than 19% of their wealth. They are not doing so mainly because they want stronger evidence that their gifts are making a difference.

But so-called impact giving is only one influence on respondents’ giving behavior. Seventy-eight percent said giving was central to their lives, and 85% said it made them feel more connected to their wealth.

The report said that although the level of wealth would always be important in determining how much donors gave, the sense of purpose transferred to families could not be underestimated.

“Bringing the family closer together, recognition among peers and developing a legacy all play a part,” the report said.

The survey found a strong connection between wealth, the size of a gift and the approach to giving. Giving becomes more strategic with the level of wealth and the size of donations.

The report said that as wealth increases, more entrepreneurial strategies replace impulse giving. But size is not the only consideration. Women at all wealth levels tend to be philanthropic, yet they typically insist their giving is less impulsive than men’s.

The research showed that tax considerations do not drive the decision-making process. Just 25% of respondents considered tax benefits a major influence on their decision to allocate. Nearly twice as many said tax benefits had no influence on their charitable giving.

However, wealthy individuals do not totally discount the tax benefits of giving, the study found. Some may like the write-off advantages, while many others would forgo these benefits or directly transfer them to the causes they support. Whatever their position, the tax code’s complexity is an obstacle to increased giving for some and completely off-putting for others.

What does drive giving, then? The research suggests wealthy individuals have to think about their own financial circumstances when deciding how much to give away. They have to maintain their wealth in order to continue their charitable giving in the long term.

Beyond this priority, the survey found that a small change in their fortunes can prompt a complete change in their giving behavior. “When an individual feels comfortable with their personal finances, they will likely increase their giving by as much as 60% on average,” the report says.

The wealthy are motivated to make gifts where they believe they can make a difference. Some of the more committed respondents said their causes were often part of a long-term family legacy; for many, a focal-point issue was religion or ethnicity.

When considering which causes to support, the survey found that donors would favor the following areas over the next 12 months:

Homelessness

Education

Society

Health

Human rights

The report said wealth advisors could be of service to philanthropists in several ways. They can help quantify how much to give for impact without jeopardizing the donor's personal situation.

An advisor can also help the donor apply the same risk-based assessments used in his or her investment portfolio to the philanthropy portfolio.

Wealth advisors can also provide innovative thinking about philanthropy, and expose the client to other significant donors, the broader giving community and other funding opportunities.

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